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Citigroup Rescue: Raw Deal for Taxpayers, But It Had to Be Done
Posted Nov 24, 2008 10:38am EST by Aaron Task in Investing, Recession, BankingExpectations for a government rescue of Citigroup were fulfilled in the wee hours Sunday night/Monday morning. In exchange for $27 billion in Citi preferred stock, the government will inject $20 billion of capital in the struggling firm and guarantee $306 billion in troubled mortgage assets.
The devil is in the details (see below), but Mark Dow, hedge fund manager at Pharo Management, said the government had to act.
"You can Monday morning quarterback and say, 'They could have done it better,' but they had to do something, and they did." says Dow, a former staff economist at Treasury and the IMF. "I wouldn't be buying Citi shares, but the Fed and Treasury are committed to protecting the integrity of the financial structure, and that has to be applauded."
Financial markets did "applaud" early Monday as Citi shares jumped more than 50% and major stock indexes rallied by more than 2.5% in the first hour of trading.
But about those details: The deal is complex in its structure, but when all is said and done the government is on the hook for about $249 billion in toxic mortgage-backed assets in exchange for $27 billion in Citi preferred stock.
The preferred shares pay 8% but, all in all, it's another raw deal for the taxpayer, which may explain why the deal's structure is so complex (they're hoping no one will notice).
ClusterStock's John Carney lays out terms of the $306 billion in loans:
- The first $29 billion of losses from the portfolio will be absorbed by Citi entirely.
- The Treasury Department will take 90% of the next $5 billion of losses, with Citi taking the rest.
- The FDIC will step in and take 90% of the next $10 billion of losses while Citi absorbs the balance.
- Losses beyond that will be taken by the Federal Reserve in the 90% government role. "Note that Citi is still supposed to take the remaining 10% at this stage but it's hard to believe that anyone really thinks Citi would be able to take any more losses once it had written down $40 billion more in this portfolio," Carney writes.
Dow says the point of this exercise is to bring about an orderly unwinding of Citi's leverage, as opposed to Japan, where bad debts were allowed to roll over into perpetuity, or Sweden, where banks were forced to take massive write-downs of bad debts before the government injected capital.
The problem with using the "Swedish Solution" for America's banks today is they might be insolvent if forced to take all the write-downs at once, Dow says.
To that point, Citi has an additional $2 trillions of assets on its balance sheet and another $1.23 trillion that are off balance sheet, the WSJ reports.
Assuming some large chunk of those "assets" ultimately prove to be liabilities, it's pretty likely this won't be the last "rescue effort" for Citigroup — or other big banks.
"Who knows what's inside these black boxes," says Dow, whose firm manages over $2 billion in assets and is in positive territory this year (he wouldn't specify). "The leverage frankly scares me. We have a lot more deleveraging in front of us in the coming years."
Ardent fan - Monday November 24, 2008 11:12AM EST
Don't know if Congress is wrong or right about this bailout; I just know what happened in the 30's when the gov't did nada. Don't think I want a return to that situation. It's all fine and dandy to say, "let the banks find their own way out" but it's quite another thing to face Depression-era conditions: 25% unemployment, etc.
Susan - Monday November 24, 2008 11:12AM EST
I guess only banks can get the bailout. for the big execs. and they make fun of the auto industry? they can't get a bailout without a plan. just because the execs come on a jet (I bet AIG and Citigroup don't have any jets), the little people...the worker bees get screwed...and there goes the American Industry as we know it...but its ok because we have BANKS...
curtis - Monday November 24, 2008 11:13AM EST
hey why worry as long as the fed has Printing Presses they will continue to print greenbacks until we need a wheelbarrow to buy bread LOL
Sandeep - Monday November 24, 2008 11:15AM EST
Finally, a sensible guy(Mark Dow) putting things in right perspective. There is no raw deal for anybody here. If you look at the alternatives, they are too bad. So looks like a great move by the government. Citi seems to be moving in the right direction so this additional time will hopefully help it to reduce all the bad loans etc. Maybe some of them will become better loans if economy improves.. Another thing SEC needs to do is ban naked shorting ASAP. That is just making bad things worse. I wonder what is taking them so long. People are loosing jobs, huge money and the jokers can not ban a negative thing like this soon enough.. I guess feds are learning after LEH disaster.
Melony - Monday November 24, 2008 11:16AM EST
Roger P. Yes the gov. does have unlimited money. Read the "Creature of Jykell Island".
__A_YAHOO_USER__ - Monday November 24, 2008 11:16AM EST
When is this madness going to stop !!! Who's next on the list? Funny, how a few weeks ago, Citi was looking to buy Wachovia, and were pissed when Wells Fargo stepped in and snatched them. Now, Citi is looking for a handout??? How did they expect to pay for Wachovia??? Oh, that's right, Uncle Sam would've have stepped in to help them out. This is a huge joke on the American People. The sad part is, 52% voted for Obama because of change. But we relected almost 100% of the SAME Congressmen. You want change, start by voting out the members of Congress who have been there for 20+ years.
william - Monday November 24, 2008 11:17AM EST
TAX rates must go up to 90% on all income above 250K! This will prevent greed
Rick - Monday November 24, 2008 11:18AM EST
More governmental screwing of taxpayers and direct interference with the market. How can any invester have any faith in this market. They screw WAMU to bail out JPM. They engage in secret deals and control the market with mega money. This allows those with power to complete the mother of insider trading.
sirdon2 - Monday November 24, 2008 11:19AM EST
WOW, another $20 billion for Citi Group, on top of the first $25 billion they already got and is gone now. I understand that the government feels it needs to rescue those who have mismanaged these huge firms into a black hole, but what about the rest of us, who tried hard to save in 401Ks, stocks, etc. for our golden years only to find out that it is, if not completely gone, there is not much left. Will the government BAIL us out also, not likely. What will happen when more fail in this way, the big 3 are next, then more banks, Retail giants, the list will keep growing. I presume that if they fail more money will be thrown after bad, But who is footing the bill? We are of course, which means more taxes, and more years of working, so long retirement, so long American dream, So long.
Henry - Monday November 24, 2008 11:21AM EST
How long can we keep selling Tbonds to the Arabs and Chinese to pay for this endless crap? When they quit buying our debts it's game over for the IOUSA!
Henry - Monday November 24, 2008 11:21AM EST
How long can we keep selling Tbonds to the Arabs and Chinese to pay for this endless crap? When they quit buying our debts it's game over for the IOUSA!
Eugene - Monday November 24, 2008 11:23AM EST
Bad move...Government is just protecting more inefficiency....where does is stop......CEO should at least just take $l.00 per year ..they made their millions already........completely disgusted....ETS
Frank - Monday November 24, 2008 11:23AM EST
How's that feel paying citi-bank 29% interest on your credit card and then paying them your tax dollars too ?
robert - Monday November 24, 2008 11:24AM EST
excellent firms don't believe in excellence, only in constant improvement and constant change. these firms that are being given "welfare" did neither.
Neil - Monday November 24, 2008 11:24AM EST
Congress is covering their own complicity in this entire mess and just stringing the taxpayer along until the bottom falls completely out and nothing done by any government will slow down or stop what has now been put in motion.
Joe - Monday November 24, 2008 11:27AM EST
By the way this may only be a temporary solution. Citi had to be bailed out in 1990 when they almost went bankrupt, so expect to keep bailing out this company out every 20 years or so as the boat seems to leak pretty freely.
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sirdon2 - Monday November 24, 2008 11:11AM EST
WOW, another $20 billion for Citi Group, on top of the first $25 billion they already got and is gone now. I understand that the government feels it needs to rescue those who have mismanaged these huge firms into a black hole, but what about the rest of us, who tried hard to save in 401Ks, stocks, etc. for our golden years only to find out that it is, if not completely gone, there is not much left. Will the government BAIL us out also, not likely. What will happen when more fail in this way, the big 3 are next, then more banks, Retail giants, the list will keep growing. I presume that if they fail more money will be thrown after bad, But who is footing the bill? We are of course, which means more taxes, and more years of working, so long retirement, so long American dream, So long.